CMU: How to Trade Emotional Markets

By Jani Ziedins | Free CMU

Feb 26

Cracked.Market University

CMU: How to Trade Emotional Markets

Traders finally decided the Coronavirus matters and the S&P 500 tumbled 8% from last week’s record close. So much for the calm and complacency that ruled since the October lows. While bears finally get to gloat over being “right”, stocks are still at levels that were all-time highs only a handful of weeks ago. Sure, prices are a lot lower than they were last week, but they are still well above levels when most bears started claiming they were too high.

I don’t mean to single out Bears because Bulls are equally prone to the same ridiculousness. Both sides get hung up on their outlook and spend far too much time justifying why they are right instead of trying to understand why they are wrong. The key to trading successfully is moving past that useless dogma and just be an opportunist. I don’t care if the market is going up or down. It makes no difference to me as long as I’m making money.

During emotion-filled periods like this, my views are definitely in the minority as people spend way too much time explaining why this selloff is either unjustified or just getting started. I have no idea what comes next and no one else does either. Emotional selloffs are the hardest things to predict because they always go “too far” and there is no way to know how far is “too far”. And just when it seems like the sky is about to fall and all hope is lost, the selling capitulates and prices snapback from oversold levels with a vengeance.

I have no idea what this market will do next, but I do know it will go “too far” in one direction and then it will go “too far” in the other direction. Armed with nothing more than that most basic outlook, we can create a fairly sensible trading plan.

If we know a big move is coming, all we need to do is jump on the next move that comes along and see where it takes us. Prices bounced this morning. Great, buy the dip, start small, get in there early, keep a stop near your entry, and only add more money after the trade starts working. If we’re wrong, prices slip under our stop, we take a small loss, and we try again next time. Maybe that is another rebound attempt. Maybe stocks tumble under the lows and we flip to shorting the weakness using the same sensible approach.

It makes no difference to me what the market does next as long as it does something. If you leave your bullish or bearish biases at the door, you can make money too.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.